Manuscript Type: Empirical
Research Question/Issue: This study investigates the association between the composition of the board of directors and corporate diversification, to explore the role of the board in corporate strategic choice.
Research Findings/Results: Based on a sample of 101 Australian publicly listed firms in 2005, this study finds that there is no link between corporate decisions on product and/or geographic diversification and two aspects of board composition – board independence and institutional representation. However, there is a positive link between total diversification and a third aspect of board composition – the proportion of directors who have ties to boards of corporations in other industries.
Theoretical Implications: The results provide support for the managerial hegemony and the resource dependency theories. Corporate strategic decisions regarding diversification are more likely to be made by management than boards of directors, and to be encouraged by interlocking directors with extra-industry ties.
Practical Implications: Contrary to the requirement or recommendation in many jurisdictions that boards be more independent, these results indicate that shareholders' interests, represented by lower levels of diversification, are not promoted under such circumstances. Interlocking directors appear to effectively link the corporation to the external business environment and to encourage diversification. Existing recommendations and regulations to align management with shareholders' interests through independent boards should be revised. Board composition should also consider directors' knowledge, relevant expertise, availability, and length of tenure.